A no-deal Brexit will leave Britain worse off, triggering falls in economic output, a rise in inflation and a drop in the pound that could leave sterling at record lows against other currencies, the Bank of England has warned.

In an intervention likely to be interpreted as a warning shot to the new prime minister and chancellor, the Bank cut its economic growth forecast for this year and next and warned that even in the event of a smooth Brexit there is still a one-in-three chance of a recession in the coming year.

The Bank left interest rates and its other monetary policy levers unchanged this month but added in the minutes to its meeting that assuming a smooth Brexit "increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target."

Image:The pound sank to a 31-month low versus the dollar earlier on Thursday

The Bank's formal position is that it bases all its forecasts on a smooth Brexit, but for the first time it added a passage in its minutes about the implications of a hard Brexit.

It read: "In the event of a no-deal Brexit, the sterling exchange rate would probably fall, CPI inflation rise and GDP growth slow."

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The Bank's forecast came as the new chancellor, Sajid Javid, pledged an extra £2.1bn of spending to prepare the UK for a no deal Brexit.

Governor Mark Carney has been frequently criticised by leading Brexiteers for intervening in the debate and warning about the economic consequences of leaving the EU, and this latest forecast is likely to put the governor further at odds with the government.

The report cut the economic growth forecast for this year and next from 1.5% and 1.6% respectively to 1.3% in each year - the weakest annual rate since 2012.

Mr Carney told reporters at a news conference: "Since May, global trade tensions have intensified, global activity has remained soft and the perceived likelihood of a no-deal Brexit has increased significantly."

"Monetary policy cannot offset the real effects of these fundamental determinants of jobs, growth and prosperity.

"But monetary policy can help smooth the adjustment of the economy to these shocks," he said.

The pound, which touched a 31-month low against the dollar earlier in the day, rose slightly back above $1.21 in the wake of the publication of the meeting's minutes and the accompanying Inflation Report.

Image:Mark Carney is due to step down as governor early next year

Sterling has been weakened since Boris Johnson took office because of market fears surrounding a no-deal exit from the EU.

However, Thursday's movements were largely dictated by a stronger dollar after the US Federal Reserve did not meet investor hopes on further interest rate cut guidance when it reduced its key borrowing rate on Wednesday night.